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Modi's new FDI policy: Real change or fooling the markets?

Neeraj Thakur | Updated on: 20 June 2016, 23:53 IST

On Monday, the markets opened under the shadow of two fears - Brexit (Britain likely exit from the Eurozone) and Rexit (Raghuram Rajan's exit from the RBI). So, the Narendra Modi government had to do something to dispel the fears of investors.

By announcing 100% FDI in several sectors at one go - pharmaceuticals, aviation, single-brand retail, animal husbandry, private security, food products - the government changed the market sentiment, sending a message that it was committed to reforms. The impact was visible on the stock market, which recovered from its early morning plunge and gained 241 points by the end of the day.

But are these announcements really big? Will they have a significant impact on the flow of FDI into India.

Remember that India is already the largest recipient of FDI, ahead of China and the US. The problem is that just 6% of it went into manufacturing in 2015. Without the manufacturing sector getting a boost, India wouldn't be able to create jobs.

So while the Modi government claimed that "with these changes, India is now the most open economy in the world for FDI", it would be prudent to wait and see if they yield better results than the changes announced in November 2015?

After all, any such policy changes must be judged on their novelty and impact on job creation.

Most of the sectors for which FDI norms were eased today are the same for which similar changes were announced in 2015. The other sectors are not in the manufacturing sector. Here's is a sector-wise analysis of the new norms:

Defence

The companies will have to seek approval from the central government for FDI beyond 49%. The condition of access to "state of the art" technology has been done away with.

In 2015, the government had allowed 49% FDI in defence through automatic route. For any additional FDI, approval by the Foreign Investment Promotion Board was made necessary. The requirement of taking mandatory permission from the Cabinet Committee on Security for FDI beyond 49% was scrapped.

So, essentially the only change made now is that foreign companies wishing to invest in the Indian defence sector would not need to have "state of the art technology".

Single-brand retail

The government has relaxed local sourcing norms for up to three years and sourcing regime for five years for entities undertaking single-brand retail trading of products using "state of the art" and "cutting edge" technology.

In 2015, the government had diluted the 30% local sourcing norm, allowing foreign firms to delay local sourcing until they opened the first store.

Also Read: Only 6% of FDI coming to India is for manufacturing. Where is govt going wrong?

Now, firms with state of the art technology can delay sourcing products locally for five years after opening the store. Companies that do not have state of the art technology can delay local sourcing for three years.

The impact of this change is likely to be minimal as single-brand retailers won't generate any jobs in the SME sector, which employs 40% of India's workforce. It would only fuel consumption-based growth.

Pharmaceuticals

This is the one sector where the changes made are actually big. Brownfield projects can receive 74% FDI through the automatic route. Beyond this, the government's approval would be needed. The previous policy mandated that approval is taken for every brownfield project.

Also Read: Why easing FDI norms could sound the death knell for #MakeInIndia

While the change is radical, it is not clear whether it would promote Indian companies or enable their takeover by foreign interests. It is a concern that has been raised since at least 2013 when the Department Of Industrial Policy & Promotion (DIPP) prepared a note against FDI in brownfield pharma products. It was back in 2008, when a slew of Indian companies like Ranbaxy Shanta Biotech and Dabur Pharma were taken over by foreign pharma giants. Indeed, it was this concern that had compelled the central government to mandate approval for FDI in brownfield projects.

Aviation

As per the new policy, airlines can now receive up to 49% FDI through automatic route. As for the likely impact, Mark Martin, CEO of Martin Consultancy, explains, "The biggest concern at the moment is funding and access to finance. The intent to increase FDI is progressive, but its timing is bad. Given the state of financial markets, we are not going to see anything earth-shattering in terms of investment anytime soon since we don't believe there are that many airlines with a few billion dollars in their wallet. We don't expect any action on the ground until the dust settles and the economy picks up."

Moreover, aviation is a services sector. So, any new investment won't have much of an impact in terms of job creation.

India already gets the most FDI of any country. The problem is only 6% goes into job-creating sectors

The other sectors saw only minor changes in FDI guidelines, or just a formal announcement of decisions already made.

  • Food product e-commerce is now open for 100% FDI.

  • Up to 100% FDI for setting up of uplinking HUBs/Teleports, Mobile TV, DTH, and cable networks operating at national, state and district levels, as well as local cable networks.

  • 100% FDI through automatic route in animal husbandry, including breeding of dogs, pisciculture, aquaculture and apiculture.

  • The establishment of branch offices, liaison offices or project offices would not require permission from the RBI if the applicant has secured permission from the ministry or regulator concerned.

  • Private security agencies can get up to 49% FDI through automatic route. More than 49% and up to 74% would require government approval.

Overall, the new FDI policy is not radical by any means. "Foreign companies look at overall macroeconomic environment in the country before investing in a particular sector. Today, India gets maximum FDI in the financial services sector because that sector gives good returns," explains Madan Sabnavis, Chief Economist at Care Ratings.

The policy, however, did manage to arrest the negative market sentiment Monday. Perhaps that was the Modi regime's purpose all along?

Also Read: Why the govt's new civil aviation policy is no game-changer

First published: 20 June 2016, 23:53 IST
 
Neeraj Thakur @neerajthakur2

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